Unsafe Deposits

NBFCs may not be able to accept deposits
To ensure that depositors’ interests are well-protected, even away from the regular banking channels, the Reserve Bank of India (RBI) is considering a proposal to gradually weed out deposit-taking non-banking financial companies (NBFC).
The caretaker. Factors forcing the RBI’s hand are the increasing concerns being voiced that the public deposits are not secure in NBFC hands. This is clear from the fact that the RBI does not accept any responsibility as far as repayments of public deposits by an NBFC are concerned. Therefore, in case a NBFC defaults on repayment, all that the depositor can do is approach the Company Law Board or a consumer forum, or file a civil suit.
The supporter. V. Leeladhar, deputy governor, RBI, says: “The RBI is looking to further strengthen the NBFC sector so as to help it grow. It had given them an option to voluntarily move out of public deposits acceptance activity. In case an NBFC voluntarily chose to get out of public deposits, the RBI would help the NBFC.”
The followers. That NBFCs are on a sticky wicket, is clear from the fact that their number has fallen from 710 at the end of June 2003, to 376 at the end of March 2008. V. Ravi, chief finance officer, Mahindra Finance, says: “We have stopped taking deposits more than five years ago.” Other companies are joining this list.
A Tata Investment Corporation spokesperson explained: “We are now an investment company and our major source of income consists of dividend income and profit on sales of investments.”
In short, NBFCs will now have to depend on alternate sources of funds, among which could be direct investments, insurance, and mutual funds.
The innovators. The real effect of the proposal would, however, be seen in residuary NBFCs, which are finance companies that depend exclusively on public deposits. For example, Kolkata-based Peerless is converting itself into a financial product distribution entity, as per the notice posted on its website.
The RBI is looking to protect the public’s interest, the only question is whether the NBFCs will manage to adapt to the change?